Credit Guarantee Fund Trust for Micro and Small Entreprises (CGTMSE)

Presentation on Credit Guarantee Scheme

MSE as defined in MSMED Act 2006

Micro and Small Enterprises (MSE) in India

MSE is governed by the MSMED Act 2006 More than 26 million units Registered / Unregistered MSEs Provide employment to more than 60 Million persons Largest employment generating sector after agriculture Employment potential at low capital cost Constitute 95% of industrial units Key contributors to national economy 45% of manufacturing output 40% of total exports 8% of Gross Domestic Product

Products of MSEs
Chemical & Chemical Products 22%

More than 6000 products

Basic Metal Industry 12% Metal Products 10%

Food products 36% Others 6%

Electrical & Machinery Parts 8% Rubber & Plastics Products 6%

CGTMSE Establishment & Corpus

Establishment

Set up as a Trust in August 2000 Administered by a Board of Trustees (BoT)

Settlors of Trust

Govt. of India (GoI) & Small Industries Development Bank of India (SIDBI) Contribution ratio is 4:1 Initial Corpus Rs.125 crore Present Corpus Rs.2,156.56 crore Committed Corpus Rs.2500 crore

Corpus

Objectives of CGTMSE
Shift from collateral to merit based lending Act as catalyst of entrepreneurship promotion Facilitate institutional credit flow to MSE sector Address growth constraints of MSE sector
Enable financial inclusion / employment generation

Revive confidence in credit guarantee mechanism

Credit Guarantee Scheme (CGS) Salient Feature

Micro & Small Enterprises as per MSMED Act eligible Both Manufacturing and Service sectors covered Credit Facility up to Rs.100 lakh covered All fund / non-fund based facility covered Maximum Cover of up to 85% of credit facility All credit facility must be extended without any collateral security Credit for retail trade, educational / training institutions and SHGs are not eligible for coverage.

Extent of Guarantee cover

Borrower Category Maximum Guarantee Cover, where Credit facility is
Upto Rs.5lakh 85% of the amount in default / Rs.4.25lakh Above Rs.5lakh to Rs.50lakh 75% of amount in default / Rs.37.5lakh Above Rs.50lakh to Rs.100lakh Rs.37.50lakh plus 50% of amount in default above Rs.50lakh / Rs.62.50lakh Rs.40lakh plus 50% of amount in default above Rs.50lakh / Rs.65lakh Rs.37.50lakh plus 50% of amount in default above Rs.50lakh / Rs.62.50lakh

Micro Enterprises

Women Entrepreneur / units located in North Eastern Region (Incl. Sikkim)

80% of amount in Default / Rs.40 lakh

All other category of borrowers

75% of amount in Default / Rs.37.5lakh

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Tenure of Cover

Tenure of Guarantee Cover for Term Credit, Combined Working Capital & Term Credit and Composite Credit is tenure of Term Credit / Composite Credit or loan termination date, whichever is earlier Where Working Capital facility alone is covered, the tenure is for a block of five years or loan termination date, whichever is earlier. Thereafter, MLI should apply for renewal of Guarantee Cover If tenure of Term Loan is 3 years, tenure of working capital will also be 3 years. After 3 years, if guarantee cover is to be continued for working capital, application for renewal to be lodged online
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Application Lodgment

For credit facility sanctioned in a particular quarter, application for Guarantee Cover should be lodged by the end of the next quarter In case of Working Capital Credit, date of renewal / review / enhancement can be taken as date of sanction In case of credit facility secured by collateral, application can be lodged after release of collateral, subject to time limits specified for application lodgment Account should not have become overdue / bad / doubtful of recovery / adjusted for debts deemed bad or doubtful of recovery as on date of application / payment of guarantee fee

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Guarantee Fee

On approval of Guarantee Cover, Demand Advice for Guarantee Fee and is to be paid upfront for commencement of Guarantee Cover In enhancement cases, Guarantee Fee is calculated on pro-rata basis for residual tenure of guarantee In case of working capital, payment is to be made within one month from Demand Advice date and in case of term credit, one month from date of first disbursement / demand advice date, whichever is later

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Annual Service Fee

Annual Service Fee (ASF) is to be paid for all accounts for which Guarantee Cover has been availed / is in force in a financial year, at the beginning of the next financial year i.e., ASF is collected in arrears and is calculated pro-rata for the first and last years. If payment is not received within stipulated period, Guarantee Cover lapses and account is liable to be closed. Annual Service Fee is to be paid till disbursement of first installment of claim Present Service Fee rate is 0.50% of credit facility sanctioned for loans upto Rs.5 lakh and 0.75% of credit facility sanctioned for loans above Rs.5 lakh
Facilitating Collateral-free Credit to Micro & Small Enterprises

Cost of Cover
Upfront Guarantee Fee Credit Facility North East Region (incl. Sikkim)
0.75% 0.75%

Others
1.00% 1.50%

Annual Service Fee

0.50% 0.75%

Upto Rs.5 lakh Above Rs.5 lakh & upto Rs.50 lakh Above Rs.50 lakh & upto Rs.100 lakh

1.50%

1.50%

0.75%

MLI is at their discretion may pass on the cost of Guarantee cover to the borrowers. However, responsibility of payment of Guarantee / Service Fee to the Trust will be on MLIs

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Handicraft Artisans

Guarantee Fee / Annual Service Fee in respect of credit facilities sanctioned to artisans in the handicrafts sector and covered under the Credit Guarantee Scheme are reimbursable by Office of DC (Handicrafts) Disbursement date / amount to be indicated while entering the details to enable system to appropriate the fee Guarantee Fee for eligible cases from April 01, 2009 is being appropriated out of the fund. For earlier cases, MLIs may inform in writing to enable appropriation of Annual Service Fee out of the fund.

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Govt. Sponsored Schemes

Government of India has been coming up with new and innovative ideas for the upliftment of the under privileged and the unemployed by bringing sponsership schemes. PMEGP is one of such schemes which was formed by merger of two schemes namely PMRY (Prime Ministers Rojgar Yojana) & REGP (Rural Employement Generation Program) The Scheme will be implemented by Khadi and Village Industries Commission (KVIC) under the administrative control of the Ministry of MSME at the National level. Loan upto a limit of Rs.25Lakh for manufacturing sector and upto Rs.10Lakh for service sector can be sanctioned by banks and the same can be covered under CGTMSE.
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

Pre-requisites for lodging claims are Guarantee Cover is in force Account classified as NPA & reported to CGTMSE Recall Notice issued Lock-in period expired Recovery proceedings initiated

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

Guarantee Cover is in Force Guarantee Cover in respect of the facility was in force at the time of account turning NPA and there are no arrears in payment of ASF. Account classified as NPA & reported to CGTMSE Account should be classified as NPA and the status updated to CGTMSE by the end of the next quarter. Lock-in Period 18 months from guarantee start date or last date of disbursement, which ever is later.

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims

Recovery proceedings initiated Suit for recovery of primary security should be filed with Lok Adalat / RRA / Civil Court / DRT / SARFAESI Act If recovery proceedings are initiated under SARFAESI Act, action as per Section 13(4) of the Act, has to be taken Backended Subsidy, if any, should be indicated Declaration and Undertaking is to be signed by an officer not below the rank of Assistant General Manager

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Lodging of claims Important*

Accounts classified as Non-Performing Asset (NPA) in a particular calendar quarter, to be reported to the Trust by end of subsequent quarter Claim to be lodged within a maximum period of one year from date of NPA, if NPA is after lock-in period or within one year of expiry of lock-in period, if NPA is within lock-in period

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

Two stage claim settlement process First installment of 75% of guaranteed portion of Amount in Default will be paid within 30 days of receipt of complete information Interest at prevailing Bank Rate will be paid in case of delay beyond 30 days Second installment shall be paid on conclusion of recovery proceedings On conclusion of recovery proceedings, final loss is shared by CGTMSE and MLI, in the ratio ranging from 85 : 15 to 62.5 : 37.5, as the case may be
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement

Amount in Default - Outstanding in the account, both principal & interest, as on date of NPA or the date of lodgment of the claim application, whichever is lower, subject to maximum of amount guaranteed Recoveries made after NPA date / payment of first installment of claim should be remitted to CGTMSE after deducting legal expenses, if any MLIs may use OTS / Compromise settlement route for recovery. CGTMSE has to be informed if such settlement is negotiated

Facilitating Collateral-free Credit to Micro & Small Enterprises

Common discrepancies
Non-lodgment of claim online Legal proceedings not initiated / action as per section 13(4) not initiated in SARFAESI cases Repayment / Outstanding details not fed properly Outstanding mentioned as on date of NPA considerably higher than the sanctioned amount Value of security as on date of NPA / lodgment of claim not mentioned Non-indication of date of issue of recall notice after NPA Declaration & Undertaking not enclosed / not signed by appropriate authority
Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Claim Settlement Scenario

Amount in Default on NPA Date CGTMSEs Liability (75%) First installment paid by CGTMSE (75% of liability) Recovery from Primary Security remitted to CGTMSE, after adjusting legal expenses Net Amount in Default (Final Loss) Second installment payable by CGTMSE (Rs.5.25lakh minus Rs.4.50lakh) Final payout to MLI (Recovery from Primary Security remitted + 2nd Installment) Rs.8lakh Rs.6lakh Rs.4.5lakh Rs.1lakh Rs.7lakh Rs.75,000

Rs.1.75lakh

Facilitating Collateral-free Credit to Micro & Small Enterprises

CGS Benefits
Credit Guarantee Scheme - A tool for Widening of credit portfolio Better management of risk Faster recovery of dues Enhancement of profitability

Facilitating Collateral-free Credit to Micro & Small Enterprises

Role of Credit Guarantee

A weak project cannot be turned into a viable one with guarantee cover and is only an additional comfort to the lender, as is collateral security Banks should evaluate credit applications by using prudent banking judgment / due diligence / business discretion in

supporting only viable projects under the Credit Guarantee Scheme and conduct the account(s) of the borrowers with normal banking prudence
Facilitating Collateral-free Credit to Micro & Small Enterprises

Guarantee Approval and Amount

As on March 31, 2011
300000 12589 250000 254000 10000 200000 G u a 150000 r a n t 100000 e e 50000 A p p r o v e d A m 8000 l o u 6000 n t 4000 G urantee A pproved 12000 14000

150034 6875

Ye a rs 53708 27457 30285 2199 1056 F Y 08 F Y 09 F Y 10 F Y 11

2000

0 F Y 01 -06

705 F Y 07

A mount(R s . C rore)

Facilitating Collateral-free Credit to Micro & Small Enterprises

RBI Working Group Major recommendations

Limit for collateral free loan be raised to Rs.10 lakh Composite Guarantee Fee of 1% p.a. Restoration of Income Tax exemption Guarantee Cover upto 85% of amount in default to Micro Enterprises for loans upto Rs.10 lakh Legal proceedings as pre-condition for invoking guarantee be waived for credit facilities upto Rs.50,000/Claim lodgment period be increased to two years Final claim to be paid after three years of obtention of decree of recovery
Facilitating Collateral-free Credit to Micro & Small Enterprises

We welcome suggestions, advice and other inputs to improve our services Contact us at : Credit Guarantee Fund Trust for Micro and Small Enterprises 7th Floor, MSME Development Centre Plot No.C-11, G Block Bandra Kurla Complex Mumbai-400051 Phone : 022-26541803-07, 61437800 (24 lines) Fax : 022-26541821 E-mail: [email protected] Website : www.cgtmse.in